The Motley Fool

3 Reasons Why Bank of Montreal Is a Steal at $78 Per Share

Bank of Montreal (TSX:BMO)(NYSE:BMO), the fourth-largest bank in Canada and the eighth-largest bank in North America in terms of total assets, has watched its stock post a disappointing performance in 2015, falling nearly 5%, but I think it is an absolute steal at just $78 today. Let’s take a look at three of the primary reasons why I think the stock will head higher from here and why you should consider making it a core holding.

1. Its strong earnings in fiscal 2015 could support a much higher stock price

On December 1 Bank of Montreal announced very strong earnings results for its fiscal year that ended on October 31, 2015. Here’s a quick breakdown of 10 of the most notable statistics from fiscal 2015 compared with fiscal 2014:

  1. Adjusted net income increased 5.1% to $4.68 billion
  2. Adjusted diluted earnings per share increased 6.2% to $7.00
  3. Total revenue increased 6.4% to $19.39 billion
  4. Total revenue, net of insurance claims, commissions, and changes in policy benefit liabilities, increased 8.5% to $18.14 billion
  5. Total assets increased 9% to $641.88 billion
  6. Total deposits increased 11.5% to $438.17 billion
  7. Total loans and acceptances increased 10.2% to $334.02 billion
  8. Total common shareholders’ equity increased 15.7% to $36.18 billion
  9. Book value per share increased 16.9% to $56.31
  10. Adjusted efficiency ratio improved 180 basis points to 60.9%

2. It is a value play

At today’s levels, Bank of Montreal’s stock trades at just 11.2 times fiscal 2015’s adjusted earnings per share of $7.00, only 10.9 times fiscal 2016’s estimated earnings per share of $7.18, and a mere 10.3 times fiscal 2017’s estimated earnings per share of $7.62, all of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.4 and the industry average multiple of 12.9.

With the multiples above in mind, I think the company’s stock could consistently trade at a fair multiple of at least 12, which would place its shares upwards of $86 by the conclusion of fiscal 2016 and upwards of $91 by the conclusion of fiscal 2017, representing upside of more than 10% and 16%, respectively, from current levels.

3. It has a high dividend and is a dividend-growth play

Bank of Montreal pays a quarterly dividend of $0.84 per share, or $3.36 per share annually, which gives its stock a 4.3% yield, and this considerably higher than the industry average yield of 2.3%.

Investors should also make two very important notes. First, Bank of Montreal has raised its annual dividend payment for three consecutive years, and the 2.4% increase it announced on December 1 puts it on pace for 2016 to mark the fourth consecutive year with an increase. Second, the company has a target dividend-payout range of 40-50% of net income, so its consistent growth should allow this streak to continue in 2017.

Should you add Bank of Montreal to your portfolio?

Bank of Montreal is an absolute steal at $78 per share, so all Foolish investors should take a closer look and strongly consider initiating positions today.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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